DEPRESSION, PRICES AND GOLD

Hokitika Guardian, 29 May 1930, Page 2

DEPRESSION, PRICES AND GOLD

The “had times” so widely deplored of late are attributed generally to the effects of the war, and to suggest to the “man in the street” that depression may be largely due to a general fall in prices caused by the scarcity of gold, will not generally appeal.either to his imagination or hi.*, intellect. Yet this is the principle maintained by economists in the Quantity Theory of Price. This doctrine means in effect that, because money represents the demand for goods, the more money there is in circulation, other things being equal, the stronger is the effective competition for commodities and the higher prices in general will rise. This view of the relation between monev and prices is completely borne out by the principal events in the world’s monetary history. The scarcity o f gold for centuries after the fall of the Roman Empire produced a general decline in prices; the influx of gold and silver alter the discovery of the New World produced a general rise in prices; and sirnilarily, the great gold discoveries iivthe middle of last century produced after 1850 a general rise in nrices that lasted for the- next 25 years.

But the Quanitity Theory is even more strikingly illustrated by the course of events during the following quarter of a century. In 1873 silvei was discarded as full powered money and the world’s available stock of metallic money, on which all the machinery of credit was based, was re duere] by quite 50 per cent. There followed from about 1875 to 1895, a world! • wide decline in general prices, which was not checked till the opening of the Rand mines and the application,of new methods of gold-saving increased the world’s stock of metaliis cu- rencv c nee more. But it is most important to notice that, just ns a general rise in prices, by increasing the gains of the producer and encouraging investment, makes '“or prosperity, so a long continued fall ill .prices tends to paraßse industry by repelling capital from ig' vestment, alul thus •produces, widespread commercial ,-aiul’ 'financial stagnation aud cfepregsipn. . /

Those who can ■ recall the. eonditon of 'New Zealand and .Australia during the ’eighties of last century will not need to be reminded how far-reaching and disastrous was the depression that followed ion tihe demonetisation of silver in 1873. But after 1895 the world, annual production of .gold liegap to rise, and before the war it had increased from about £30,000,000 to ovejr £90,000.000 per year. Under the stimulus of the increased demand for goods industry : flourished, so that the word’s trade grew by leaps and hounds and general prosperity feigned. Between 1893 and the outbreak of the war the annual increase in the world’s stock of gold was about 3.7. per cent, and this was accompanied by a rise in general prices ranging from 15 to 20 per cent. But since 1918 the average increase in gold production has been less: than 2 per cent per annum, anc) the effect is seen in a general fall in prices and consequent industrial oppression.

Of course ho economist suggests that-' either prosperity or depression can be accounted for solely by reference to the amount of currency offered in for goods; but the general effects of fluctuations in the volume of the circulating medium are as set forth above. Professor Cassel has calculated that an annual production of ;3 per cent of the world’s total supply of gold is needed to prevent the general level of prices' from falling, or as, he puts it, to meet the general economic development of the world. Rut if or the past twelve years the average increase, as we have seen, has been only 1.8 per cent, and the effect of this failure on the part of the goldproducers to keep pace with the world’s needs are manifested in the fall of prices and the decline of the world’s industries.

Naturally this problem is complicated by Ihe working of the machinery of credit, by the competition of the great nations tha 1 : have restored the gold standards since the war, and by the aceummulation of vast stocks of gold in America and France. But the position is substantially as stated. The world is not getting all the gold needed ihe demand for goods is falling off relative to the supply, industry is languishing, capita! is being withdrawn fro.m investment, and we can observe throughout Europe and America all the phenomena that characterise “bad times.’ It is quite possible that the new International Bank will be able to do something to relieve the situation. But failing a general increase in the gold supnlv, or a eomiVete reconstruction ‘elf the world’s financial system, the fall in prices, and therefore the industrial weakness and stagnation occasioned bv it, scorns likely' to endure' for a long time to come.